Netflix shares mount comeback on results

Analysts mixed on whether troubled firm has begun turn-around

SAN FRANCISCO (MarketWatch) — Investors gave Netflix Inc. breathing room Thursday, sending the online video provider and DVD-rental company’s stock up more than 22% following its better-than-expected fourth-quarter earnings results

Reuters

Netflix CEO Reed Hastings

Netflix
NFLX, -0.39%
shares climbed $20.97 to close at $116.01 — the highest closing level for the stock since the company’s last earnings report in October. The shares are still well below their $300 level from the summer of 2011, before a series of controversial moves sent investors fleeing.

Still, Netflix’s shares have turned into a market darling this year, rising more than 67% in less than a month.

Late Wednesday, the company reported a quarterly profit of $41 million, or 73 cents a share, on revenue of $876 million. During the same period a year ago, Netflix earned $47 million, or 87 cents a share, on revenue of $596 million.

Netflix also said it added 610,000 total subscribers, giving it 24.4 million total subscribers at the end of 2011. The addition helped the company end a skid in which it recorded subscriber declines as customers defected following several unpopular moves that included splitting its DVD and video-streaming rental plans in two and effectively raises prices by as much as 60%.

But Mark Mahaney, of Citigroup, said Netflix seems to showing signs of recovering from last year’s debacles, which also shaved more than 77% off of the company’s stock price between July and December of last year. Mahaney raised his rating on Netflix’s stock to buy from neutral and lifted his price target to $130 a share from $80, saying that the company is showing “four key signs” of recovery and stabilizing of its business.

Mahaney keyed in on Netflix’s outlook for adding streaming video customers, its margin levels, lower expected losses from international expansion efforts and signs that customers remain satisfied with Netflix’s service as supporting his more upbeat take on the company.

“Netflix’s execution track record, even with the [2011] pricing and product mistakes, is relatively strong,” Mahaney said in a research note. “And the Netflix streaming story is still [in its] early days.”

Scott Devitt, of Morgan Stanley, said the quality of subscriber numbers, along with the earnings results, should provide a bit of comfort to Netflix shareholders. Devitt, who holds an equal weight, or neutral rating on Netflix’s stock, said on the plus side, “Domestic streaming [business] looks like it will return to normalcy” in the first quarter of 2012.

Whlie Mahaney and Devitt felt good about Netflix’s prospects, at the other extreme was Wedbush analyst Michael Pachter, who maintained his underperform, or the equivalent of sell, and $45-a-share price target on the company’s stock.

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Pachter said that while Netflix did beat analysts’ consensus earnings and sales forecasts, and exceeded his own subscriber growth expectations, he isn’t sold on the company’s turnaround, adding that Netflix is “having their cake and eating it, too.”

Pachter argued that between expected losses this year, due in large part to bringing its service to the U.K. and Ireland, and what he called “underestimating the impact of losing Starz on the quality of streaming content.”

Netflix failed to re-negotiated a content deal with Liberty Interactive Corp.
LINTA
which controls the rights to the online and pay-TV content of Sony Corp.
SNE, -1.14%
and Walt Disney Co.
DIS, -0.43%
. The expiration of the Netflix’s deal with Starz, in February, means that popular titles such as “Toy Story 3” and “Tangled” will soon disappear from Netflix’s video-streaming service.

On a conference call to discuss the results, Netflix Chief Executive Reed Hastings downplayed the loss of the Starz content, saying it only affected titles from the Encore TV network and 15 so-called Disney “Pay 1” videos, which altogether account for 2% of Netflix’s domestic viewing hours.

But Pachter said the Disney movies, in particular, are “some of Netflix’s most desirable streaming content,” and that the titles from Encore are “a diverse catalog that enhances the depth of the streaming offering.”

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